Fionna Gavin Joint Head of Insurance, Partner
UK steps up sanctions regime and shipping must navigate carefully
Following the UK’s departure from the EU, there have been some recent developments with regard to the approach of the UK to sanctions, including the issuance of guidance to the shipping industry on financial sanctions. We summarise some of these recent developments below.
HM Treasury issues Maritime Guidance
The HM Treasury Office of Financial Sanctions Implementation (OFSI) has recently issued Maritime Guidance (the “Guidance”) on financial sanctions for the shipping industry. A link to the Guidance can be found here.
Broadly speaking, the Guidance is targeted at entities and individuals which operate in, or with, the shipping sector, particularly those that may be subject to UK financial sanctions restrictions. It includes an explanation of the key features of the UK financial sanctions regime and its objectives and highlights certain activities as potential red flags requiring further investigation.
Financial sanctions targeted at entities and countries are designed to restrict the access of those persons to funds and economic resources. The Guidance confirms that a number of vessels and companies are on the UK’s consolidated list of financial sanctions targets and that “a vessel, firm or individual that is owned or controlled directly or indirectly by a designated entity is also captured under financial sanctions regulations”.
Ownership and control of a targeted entity is defined broadly. In addition to the usual factors, such as a party having more than 50% of the shares in a company, ownership and control can include the right to exercise a dominant influence over a company, for example by means of a front company. If the relevant degree of ownership/control exists, the financial sanctions will also apply to that owning/controlling entity e.g. it will also be subject to an asset freeze even though not expressly identified. Of course, such relationships are not usually advertised and fronting companies may well be named with the objective of misleading contractual counterparts.
The Guidance sets out certain illicit or suspicious activities in the shipping industry that may give rise to sanctions issues. These include ship-to-ship transfers (STS), turning off a ship’s automatic identification system (AIS), cyber-attacks and the use of false documentation. The targeting of AIS and STS as “an indicator” has been an issue flagged with both the US Office of Foreign Asset Control (OFAC) and OFSI as potentially mis-leading as often they are legitimate activities. The Guidance explains that many of these activities could be used to confuse or conceal the identities of vessels, cargo, routes and ports and that those operating in the shipping sector should be alive to these risks and carry out due diligence to account for them.
an STS transfer could be used conceal the origin and/or nature of the cargo and has been used in the past to illegally transfer coal, crude oil and petroleum products to avoid sanctions.
whilst there may be legitimate reasons that a vessel might turn off its AIS (permissible under SOLAS), for example if it is going through a high risk area, it can also be used to try and hide the location of a vessel carrying out an illicit activity.
bills of lading, invoices and insurance paperwork can be falsified to conceal the origin of the vessel, its goods and its destination.
Whilst these practices are not necessarily breaches of financial sanctions in themselves, the Guidance notes that they can be used to facilitate transactions which are and, if unaccounted for, might raise suspicion that the vessel is carrying out illicit activities.
The Guidance provides some detail of regions and/or countries which can be considered high risk in regards to financial sanctions compliance and where it is sensible to carry out due diligence when dealing with them, including the Democratic People’s Republic of Korea (North Korea), Iran, Libya and Syria. It is important to bear in mind that this list is not exhaustive and there are a number of other countries in respect of which the UK maintains financial sanctions.
OFSI does not specify what due diligence should be carried out but only offers guidance as to what companies might do to ensure compliance with financial sanctions. This includes;
having a proper understanding of the sanctions regulations in place when operating in high-risk jurisdictions and areas;
considering whether an ‘AIS switch off’ clause might be useful in contracts;
carrying out proper compliance and due diligence in regards to company ownership structures, vessel flag information and details of home and recently visited ports; and
being alive to suspected fraudulent letters of credit, bills of lading, loans and other financial instruments.
It is made clear that it is the responsibility of the company or organisation to ensure that it has proper systems in place to safeguard against breaching financial sanctions.
Finally, the Guidance sets out the reporting requirements if a person has dealt with funds or economic resources connected to a designated person as well as the obligation on Masters to report suspicious activity.
UK Human Rights designations
On 6 July, The Global Human Rights Sanctions Regulations 2020 (the “Sanctions Regulations”) came into force in the UK. This is the first time the UK has imposed sanctions on people or entities for human rights violations independently of the EU and UN and is a significant development in UK sanctions policy.
The Sanctions Regulations were issued pursuant to the Sanctions and Anti-Money Laundering Act 2018 and, in the first instance, the UK has imposed sanctions on 49 individuals and organisations that the UK considers to be involved in human rights abuses.
The Sanctions Regulations are different to traditional geographical, trade or financial sanctions and allow the UK to impose sanctions on ‘designated persons’ who, inter alia, commit, facilitate, incite, promote or support human rights abuses, including persons who financially profit from such abuses or are ‘involved’ in the same.
In particular, the Sanctions Regulations give the UK the power to ban people or entities considered to be an ‘involved person’ in serious human rights abuse ‘activities’ from entering the UK, from channelling money through UK banks or profiting from the UK economy.
The term ‘involved person’ is given a broad meaning and, where that person is not an individual, includes companies that are owned or controlled directly or indirectly by a person who has been involved in ‘activities’. Control broadly equates to: (i) a person owning more than 50% of the shares, more than 50% of the voting rights or holding the right directly or indirectly to appoint or remove a majority of the board of directors and; (ii) that it is reasonable, having regard to all the circumstances, to expect that the owning/controlling party expects that person to act in accordance with their wishes.
“Activities” includes an activity which, if carried out by or on behalf of a State within that territory would amount to a serious violation by that State of an individual’s basic human rights. An activity also includes an “omission”.
An individual or company can been deemed ‘involved’ in an activity for a number of reasons including: concealing evidence of an ‘activity’; providing goods, technology or economic resources for an ‘activity’; or where a person benefits from an ‘activity’.
As is common with other sanctions regimes, once a person has been designated they are subject to an asset freeze, meaning that another person cannot make funds or economic resources available directly or indirectly to that designated person and, unless they qualify for an exception/licence, will be committing an offence should they do so. Companies and individuals will, therefore, have to be alive to any exposure that they may have with designated persons and should ensure that they have appropriate due diligence and policies in place.
The Sanctions Regulations also contain reporting requirements on ‘relevant firms’ if they suspect that a person is a designated person. ‘Relevant firms’ can be broadly categorised as financial, business and professional services firms, trust companies and estate agencies but this is not an exhaustive list.
A breach of the Sanctions Regulations may result in imprisonment for up to seven years and/or a fine.
The designations of the 49 individuals and organisations is the first wave of ‘designations’ under the new regime and paves the way for further sanctions to be introduced going forward.
The Guidance for the shipping sector follows a similar approach by the US authorities in specifically targeting the shipping industry and its compliance with sanctions. OFSI have made it clear that the issue of the guidance is completely separate to anything issued by OFAC and that there is no “arrangement or agreement” with the State Department in the USA. Whilst it remains to be seen what further action may be taken by the UK in this area, it puts into renewed focus for those involved in shipping the need to ensure that they navigate through the various sanctions restrictions with care. The penalties for a breach of sanctions can be severe and the Guidance reinforces the need for companies to carefully consider their position when it comes to sanctions.
As ever, when new sanctions regulations come into force, businesses should ensure that their sanctions clauses and policies provide adequate cover and that compliance checks are carried out on all counterparties to ensure that business is conducted in accordance with the relevant sanctions regimes. Relevant authorities are unlikely to accept any ignorance of sanctions restrictions and, given the escalation of enforcement action over the last few years, businesses should ensure that they take appropriate steps to avoid the risk of any breach.